Dubai’s latest moment of turmoil is being talked up as a test of ‘Islamic finance’. But is it really? The problem: in 2006 Nakheel Development Ltd issued bonds to the value of three and a half billion dollars, and can’t pay out when they mature next week. The issue in question is ‘sharia-compliant’. This kind of bond, known as a ‘sak’ (plural ‘sukuk’) has seen huge growth in the Islamic and non-Islamic world over the last ten years.

I’ve explained in the LRB how sukuk work, and how governments and corporations in the West wanting to borrow money are getting keen on them: The UK Treasury had been planning an issue but it went on hold after the banking meltdown; last month General Electric issued $500 million of sukuk with Middle Eastern investors in view. Very roughly, a bond is Islamic when there’s a tangible underlying asset on which the issue is based – for instance real estate – and when there are no guarantees saying the investor can’t lose: risk has to be shared between borrower and lender.

The rapid convergence of Islamic and conventional finance plus the high-level collaboration between intellectuals and product-engineers in both camps have done wonders for sharia-compliant instruments, but there are pitfalls. One is the preference of conventional investors for a guarantee on some kind of return. That’s not permissible in Islamic finance, though if you’re an investment banker or corporate fundraiser you might find a sharia expert who could see a way around the difficulty and put his imprimatur on your product to make it attractive. Looking for a friendly scholarly opinion on a product is known as ‘fatwa shopping’. Way back before the banking crisis, more than one expert cast doubt on the ‘Islamic’ nature of most of the sukuk in circulation and last year one of the two global Islamic finance overseers began trying to tighten up the rules.

Does the ‘repurchase undertaking’ given to the buyers of the Nakheel sukuk constitute a guarantee? If so, then you could argue the bond isn’t strictly Islamic. You could also say investors placed too much confidence in the Emirates food chain: Nakheel is part of the investment company Dubai World, and Dubai World is owned by the Dubai government, whose current level of debt makes it the temporary ward of its friendly UAE neighbour Abu Dhabi. The Dubai government has said this isn’t a state matter and it won’t rescue the issue; meanwhile, few signs that helpful cousins in Abu Dhabi are about to push a cheque across the table.

The Nakheel flop has much less to do with sharia-compliant finance than it does with the property bubble in Dubai. To see how the balance stands between realism and bright-eyed self-congratulation in the Nakheel culture, ‘where vision inspires humanity’, go to their website and then ask how Dubai might look in 2050, when the population of the planet hits nine billion. For minds on the money, that’s only a couple of investments away: a US Treasury long bond purchased in January 2010 matures in 2040; redeem it at term, then buy into some ten-year bonds and all of a sudden you’re there. Somewhere along the road, the little emirate, a long-term beneficiary of geography and geology, will have to find a new purpose in adversity. During the Second World War, Butlin’s holiday camps became quarters for the military.